Bulk of pension assets still at top end

Large funds continue to dominate global pension assets. The Willis Towers Watson Global Pension Assets Study 2017 found that total pension assets at the end of 2016 were $36.435 trillion. The world’s largest 300 pension funds now account for 42.5 per cent of that. The largest 20 funds alone account for 17 per cent.

The largest pension markets in the world, by total assets, are the US, UK, Japan, Australia and Canada.

The US dominates with $22.48 trillion, followed by the UK with $2.86 trillion, Japan with $2.80 trillion, Australia with $1.58 trillion and Canada with $1.57 trillion.

The largest seven markets, which also includes the Netherlands and Switzerland, account for 91.7 per cent of the world’s total pension assets.

Over the last 10 years, the Hong Kong market has experienced the fastest growth, with a compound annual growth rate of 7.8 per cent for the decade. It was followed by the Australian market, with a rate of 6.9 per cent, and the US at 4.9 per cent. Three of the largest 22 markets experienced negative growth over the last decade (France, Japan and Spain).

In the US, the top 10 pension funds represent 8.5 per cent of total assets, but the top 10 Japanese funds represent 63.7 per cent of total assets in that market. The distortion is due primarily to the Government Pension Investment Fund, which represents 43.5 per cent of Japan’s pension assets. In the UK, the top 10 pension funds represent 16.2 per cent of total assets.

In terms of asset allocation, real estate and other alternatives have been the biggest winners over the last 10 years, with an increase in allocation from 4 per cent to 24 per cent across the largest seven pension markets in that time period.

In the 2017 report, Australia, the UK and US have above-average allocations to equities, while the Netherlands and Japan have above-average allocations to bonds.

The home bias in equities has fallen over the past decade, from 68.7 per cent to 42.8 per cent across the largest seven markets.

Defined contribution assets continue to make up more and more of the market, now accounting for 48.4 per cent, up from 41.1 per cent in 2006. Australia and the US have the largest proportion of defined contribution assets, with 87.0 per cent and 60.1 per cent, respectively.

The report states there are six factors that are growing in influence on pension fund development.

They are:

Improvements in governance

Risk-management focus

Pension design towards a defined contribution model

Pressure for talent

New value chain. A more effective value chain will emerge, with the use of passive and smart beta leading to modest fee compression.

ESG and stranded assets. The move towards more integrated approaches to managing ESG factors and exercising better stewardship over ownership is gathering pace. This will require the support of increased disclosure, measurement and analysis of extra-financial factors.